Future Standardisation of Financial Messages – Quo Vadis?

For financial services messaging, the widely used standard is
ISO 20022
and it describes a common platform for the development of messages. Based on the framework, users can develop messages and migrate them to a common extensible markup language (XML) or ASN.1 syntax (ISO 20022, 2012). The XML ISO 20022 standard is also used by the Common Global Implementation (CGI) initiative, which was launched as a forum for financial and non-financial institutions to exchange information and implementation experiences related to corporate-to-bank use of ISO 20022 messages.

Originally this forum was driven by customer demand for multi-bank coordination of implementations and was intended specifically for global, multi-country, multi-bank and multi-instrument implementations. The main goal of CGI is to simplify implementation for corporate users, by the creation of clear and unified rules for messages and other areas that CGI is dealing with. This should lead to the promotion and wider acceptance of ISO 20022 as the common XML message standard used between corporates and banks.

Unlike most standards, CGI rules were not launched by any official authority. Thanks to a pragmatic approach and consultation, it steadily gained acceptance as the main set of rules for the financial messaging format. All rules were applied voluntary by banks and corporates based on a mutual agreement, which can be considered quite unusual.

CGI is attractive to banks for several reasons. As it will lead to a set of unified rules being used, banks which are part of CGI are more attractive from a corporate’s implementation perspective. In addition, it should not be overlooked that some banks are less experienced in multi-country implementations and can use the experience and tips from other group members as well as the CGI country templates to simplify the roll-out to a new country. An essential CGI benefit for corporates is the possibility of using the same message structure for all their payments with all of their transaction banks and reaching any payment system across the globe.

This creates flexibility and means relative ease in switching from one bank to another in a certain country or region – at least from a system perspective. It is also worth mentioning that CGI cooperates with the major enterprise resource planning (ERP) and treasury management system (TMS) vendors, who have prepared implementation packages based on CGI specifications. All the arguments listed above should consequently lead to a reduction in the cost of implementation projects. Equally important is the fact that most of the international cash management banks are now part of CGI, and are obliged to adhere to the guidelines approved by CGI group.

The Bank Services Billing (BSB) Standard.

Once a bank implementation project is completed, billing for the services (including payments, receivables, liquidity management and statement reporting) provided by the banks will commence. However, as most banks have their own billing platforms and methodology – and sometimes more than one in the same bank – it is not straightforward to have an overview of the incurred charges or to compare pricing of different banking partners.

To solve this issue the Bank Services Billing (BSB) standard has been developed by the not-for-profit industry group
Transactions Workflow Innovation Standards Team (TWIST)
. The BSB standard defines an electronic statement sent by financial institutions (FIs) to their corporate clients. The statement gives a detailed overview of services used and their associated fees and charges. The BSB statement defines the amounts and related charges for all billable services in one billing cycle, usually a month. BSB streamlines the bank’s billing process, allowing straight-through processing (STP). As a result, corporates have improved insight into the total costs of banking services and can actively evaluate and benchmark banking partners to facilitate the negotiation of reduced fees. Compliance with internal control mechanisms and market regulations is also easier, as the bank fee process is standardised and centralised.

From the banking side, a new product enables them to differentiate themselves from competitors in terms of efficiency and transparency in their billing process. However, BSB does replace or change the existing bank invoices; how, when and what the client is actually invoiced remains the same. This is essential, because BSB has the objective to automate and complement existing bank processes activities. It provides the opportunity to be used as a tool for better monitoring of banking costs.

Advantages and Challenges of Standardisation

Most standards have as many supporters as detractors. Objectively assessing the strengths and weaknesses of a standard is rather difficult as it is dependent upon many factors. They include the standard setting authority, the complexity of the standard, timeliness for implementation and – perhaps most important – utility for all standard beneficiaries. Nevertheless, many characteristics of an efficient standard were already covered in the CGI and BSB initiatives reviewed above.

It should be mentioned here that there have been other successful standards, such as
Financial products Markup Language (FpML) and eXtensible Business Reporting Language (XBRL)
. However not every standard developed is always widely accepted by business, especially one that is open to interpretation by different parties. For example, the United Nations developed Electronic Data Interchange for Administration, Commerce and Transport, aka UN/EDIFACT to minimise paper transactions in business, but it was considered too complex and widely modified to the extent that it could hardly be considered a ‘standard’. Today it is increasingly being replaced by XML messages, which are easier to read and implement. .

The main challenge with messaging standards is the cost of implementation without the expected efficiency gains. If the standard is not pragmatic enough, it can hinder, or even reduce, basic activity (for example when introduced by generic regulation). Ongoing efforts to develop new standards and the diversity of existing standards are making it less clear-cut as to which standards a corporate should adhere. When setting up bank connectivity, one of the first questions corporate clients often ask is: “what standard(s) should I use?” As there is no ‘one size fits all’ answer, some will be better suited for certain types of messages than others. Although some are tempted to create additional standards and use them in parallel, this increases complexity exponentially and is not feasible from a cost perspective. Independence, potential efficiency gains and cost savings are often the main motivators for adopting a standard, so those that focus on these topics will have wider acceptance.

In the future, the development of messaging standards will be related to the potential convergence of different standards. Today’s multiple standards are, to some extent, covering the same functionality, which implies they can be integrated or merged to simplify the messaging landscape. These ‘normalised standards’ should be able to include new requirements and changes in regulation, such as the introduction of the single euro payments area (SEPA) or the European Market Infrastructure Regulation (EMIR). Finally, despite financial services being relatively advanced; other sectors still rely heavily on paper messages or have a wide array of different standards or formats. Future standards development could include some of these sectors as well.

Conclusion

Electronic messages are indispensable in modern business and require consensus on their layout and content to maximise their implementation and adoption potential. A well-thought through set of standards is essential as organisations will only become more interconnected in the future, further increasing the number of electronic messages exchanged. Ad hoc introduction of new standards based on new requirements is not recommended, since they reduce the potential in terms of efficiency and savings of the existing standards.

Standards covering the same functionality should be consolidated as much as possible and be able to cope with future regulatory changes. Initiatives such as CGI and BSB are examples of what can be achieved through merging existing standards, rather than creating new ones, helping to simplify the messaging standard landscape.

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